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These MLPs Are on Fire Today

By Matthew DiLallo - Jul 19, 2018 at 11:52AM

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In March, regulators reversed a key tax rule that had made gas pipeline MLPs viable. The final policy announced Wednesday gives those businesses a way to adapt.

What happened

Shares of several master limited partnerships (MLPs) took off on Thursday after the Federal Energy Regulatory Commission (FERC)  finalized a new policy relating to the tax code overhaul passed at the end of 2017. Leading the way higher were TC Pipelines (TCP) and Dominion Energy Midstream Partners (NYSE: DM), which were up 28% and 30%, respectively at 9:45 a.m. EDT. Fellow midstream majors Enbridge Energy Partners (EEP) and Spectra Energy Partners (SEP) were also up on the news, with shares of both rising more than 6% in early morning trading.

So what

In March, FERC dropped a bombshell on MLP investors by reversing a long-standing policy that had allowed these entities to collect an additional fee to cover income taxes as part of their cost-of-service rates on long-haul pipelines. This rule change weighed heavily on MLPs that were majority-owned by other energy companies, since they used this rate structure to cover the taxes they would pay on the income received from their MLPs. Among the hardest hit were Dominion Energy Midstream Partners -- owned by utility Dominion Energy (D 0.61%) -- and TC Pipelines, controlled by Canadian pipeline giant TransCanada (TRP 2.39%). Meanwhile, Enbridge Energy Partners and Spectra Energy Partners, which are both sponsored by Canadian pipeline giant Enbridge (ENB 0.96%), also sold off on that early-spring news, which subsequently led Enbridge to offer to acquire its MLPs.

A dollar bill shaped as an arrow that goes down and then sharply higher.

Image source: Getty Images.

However, on Wednesday night, the regulator finalized a new policy on gas pipelines. Under the final ruling, FERC provides operators of interstate natural gas pipelines with options to address the revenue changes that resulted from the elimination of the tax allowance, which could lead to an adjustment of rates to a "just and reasonable level" for both pipeline companies and customers. This means they'll be able to mitigate much of the impact the policy change would otherwise have had on their cash flow.

Simply put, this adjustment could make MLPs viable funding vehicles for energy companies once again, since they could drop down natural gas pipelines to these entities without seeing significant drops in income. Dominion Energy, for example, had hoped to drop down up to $8 billion in assets to Dominion Energy Midstream to support its long-term financing plan, which would have grown the MLP's distribution at a 22% compound annual rate through 2020. The rule change initially had Dominion exploring an alternative funding plan. However, that might not be necessary now that FERC has provided it with options to address the lost cash flow from the tax allowance.

Now what

The initial FERC policy change caused energy companies to rethink their views on the MLP structure as a way to finance growth. While the finalized policy provides them with methods to cushion the blow, it's still unclear if it will be enough to make MLP's viable funding vehicles once again. Because of that, investors should hold off on opening positions in Enbridge Energy Partners, Spectra Energy Partners, Dominion Energy Midstream, and TC Pipelines until there's more clarity on what Enbridge, Dominion, and TransCanada plan to do with those entities.

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Stocks Mentioned

Enbridge Inc. Stock Quote
Enbridge Inc.
$42.18 (0.96%) $0.40
TC Energy Corporation Stock Quote
TC Energy Corporation
$53.03 (2.39%) $1.24
Enbridge Energy Partners, L.P. Stock Quote
Enbridge Energy Partners, L.P.
Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
$78.62 (0.61%) $0.48
Spectra Energy Partners Stock Quote
Spectra Energy Partners
TC PipeLines, LP Stock Quote
TC PipeLines, LP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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